How we can make globalisation fairer

We need international action to halt the slide on corporation tax.

The world's wealthy and powerful have convened in the small Swiss town of Davos this week with income disparity high on the agenda. But although it tops the list of CEO risks, no one here appears clear about how to deal with the problem.

The global financial crash should have been the left's moment but now in the fifth year of the crisis, which unpicked many of the principal assumptions of neoliberalism and the Washington Consensus, social democrats and progressives are no closer to having an analysis about how to make the global economy work more equitably and sustainably.

The occupy movement have done much to raise awareness of the issue - spooking company bosses along the way - but they have been largely silent on alternatives, passing the buck to politicians. In the UK our elected representatives have fallen over one another to call for a more popular, responsible or mutualist form of capitalism but suggest micro measures at the domestic level. They miss the point that global fairness in a global economy starts at the global level.

A new report by IPPR, launched today in Davos, takes an analytical and historical look at globalisation to break it down into component parts and understand what has delivered progressive outcomes and what has failed. On the BBC's Today programme this morning, Lord Mandelson - who led our Globalisation project and wrote a foreword to the report - spoke of how markets, while indispensable, can become volatile and need to be regulated, and that globalisation creates income inequalities. Unlike the laissez faire approach to globalisation of the 1990s which appeared to see globalisation as an end in itself, we see that globalisation has the potential to lift people out of poverty and expand the global middle class, as it has most dramatically in China, but that it comes with risks too.

Chief among the risks are the prospect of a downward spiral on corporation tax and the excessive volatility inherent in some forms of capital mobility. The first has moved the tax burden away from global corporations towards individual income, consumption and domestic firms; the latter is part of a wider problem in the financial services sector where pay and performance have become unhinged with all the incentives geared at the short term gains rather than long term value.

Our report recommends concerted international action to halt the slide on corporation tax by making profits across Europe contingent on where sales, staff and production is actually based rather than where the head office is registered. We also push for a more widespread understanding that capital controls, which the IMF now advocate but other organizations like the WTO still oppose, are a legitimate policy in certain circumstances.

In surplus countries like China, health, unemployment and retirement insurance systems are key to reducing savings rates and increasing domestic demand. Conditional cash transfers, like, for example, former President Lula's 'bolsa familia' policy of giving poor families incentives to vaccinate their kids and send them to school, are also a good way of lifting living standards.

In current account deficit countries like the UK and US, the challenge is to increase levels of trade. The projected increases in the global middle class create huge export opportunities for Britain in educational services, higher education, medical devices,green technology, the creative industries and tourism as well as our more traditional comparative advantages such as financial services, aerospace and pharmaceuticals.

In addition we must ensure that consumption is based not on debt but on rising wages. Efforts to broaden the living wage is key to this but so too should countries like Britain reorient their welfare policies towards the crisis points that globalisation can cause like unemployment. Wage loss insurance, which would mean higher benefits when people lose their job but a requirement to pay it back when they return to employment, is another idea worth exploring. Ensuring that Britain

Meeting the concerns of citizens everywhere who feel anger at the growing disparities in society at a time of austerity is by no means easy. But it is essential if governments and CEOs are to avoid an even bigger populist backlash.

Will Straw is Associate Director at IPPR

Will Straw was Director of Britain Stronger In Europe, the cross-party campaign to keep Britain in the European Union. 

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation